Who will win the GDS Vs. American Airlines War?

If you’re familiar with the travel industry you probably heard about the lawsuits flying back and forth between American Airlines (AA) and Sabre.  To an outsider it may just seem like another squabble between two travel industry giants, but there’s a lot at stake here for the average consumer who travels for pleasure or work.

American Airlines

At stake is the fact that the traditional GDS’ are trying to hold on to their dominance in distributing airline tickets to consumers, but American Airlines is trying to steer both the end-consumer, and more importantly, the travel agent directly to its booking engine instead.  The jury is still out as to whether American Airlines will be able to drive the consumers to its Direct Connect portal as opposed to the traditional form of distribution (GDS).  Let’s examine the background first in order to answer the question as to who is going to win this war.

What is a GDS?

Global Distribution Systems (GDS) grew after World War II when air travel started to become more affordable, so it was no longer just for the rich.  Prior to this, the Civil Aeronautics Board would tightly regulate all air travel and pricing for the airlines.  An agent would have to go through the Official Airline Guide and figure out an itinerary and then either pick up the phone or telex airline staff to make the reservation.  Due to the increase of air travel this system became impracticable.

Sabre Holdings

A more automated way of ticketing was needed.  In 1953, Trans-Canada Airlines (TCA) was the first airline to use a computer based system to process tickets.  It was invented at the University of Toronto, but unfortunately it had some short-comings as airline agents would spend a lot of time with the input and output of the data.  Ferranti Canada became involved and used a system of punch cards and a transistorized computer.  The ReserVec was born in 1963 and the airline started using terminals at all TCA offices.  Now queries could be produced in one second without the involvement of a remote agent.

Even though TCA became the first airline to use an automated ticketing process, it was American Airlines that launched the largest Airline Reservation System (ARS) in the form of joint venture with IBM.  In 1959 the two companies collaborated on developing a new automated ticketing system and the result materialized in 1964 with the launch of the Semi-Automatic Business Research Environment (SABRE).  At the time of the launch it was the largest civil data processing system in the world.  Other airlines soon followed with their own systems, such as Apollo (United & TWA), DATAS (Delta) and SystemOne (Eastern Airlines).

Soon travel agents began demanding direct access to these systems, but it wasn’t until the airline industry deregulated that travel agents got access on large scale.  European airlines soon followed as well with their collaboration, which created Amadeus.

Over the years the airlines spun off their stake in the GDS’ as they all became privately owned.  Currently Sabre is headquartered in Southlake, TX.  Worldspan and Galileo became part of Travelport and are located in Atlanta, and Amadeus is headquartered in Madrid, Spain.  There are several other players in the world, such as Abacus, TravelSky, Patheo, KIU and SHARES by EDS, but Sabre, Travelport and Amadeus are the largest GDS’ in the world.

How do the key players (Airlines, GDS’ & Travel Agents) make money?

In general, when a consumer pays for an airline ticket through a travel agent there are three parties that will divide the money.

1) Travel Agents: The travel agent will charge the consumer a service fee.  It varies greatly, but in general a consumer can expect to pay around $20-$25 in service charges if they use a travel agent.

2) GDS: The GDS’ in turn will earn fees in three ways.  They charge a per ticket fee to the airlines, which is about $12 per ticket on average.  They also collect fees from the airlines and travel agents for using their system.

3) Airlines: Of course the remainder of the funds go to the airline.

What is changing?

The value the GDS’ have given over the years has been incredible, but with the rise of the internet the end-consumer has ‘direct’ options to purchase tickets without having to use a travel agent and therefore a GDS to obtain airline tickets.  In essence, the internet would allow a company like American Airlines to cut out the middlemen, but now American Airlines is also aggressively trying to lure the travel agent away from the GDS’ and to its Direct Connect portal.  American Airlines stunned the world in 2009 when they announced that they would solely concentrate on American Direct Connect Service going forward, which would bypass any other form of distribution network, such as Sabre, Galileo or Online Travel Agent (OTA) channels such as Expedia, Orbitz, which also utilize GDS’ for processing reservations.

What are the benefits to American Airlines?

1) Cost – by bypassing the traditional distribution networks such as the GDS’ and the OTA channels the airline can save $12 per ticket.  American Airlines sells millions of airline tickets through the GDS every year, multiplied by $12 it would result in tens of millions of dollars in savings annually.

2) Customization – Direct Connect will allow American Airlines to up-sell to its consumers by offering extra legroom, access to the Admiral Club, pay for extra luggage, etc.  These are the types of extra fees the GDS’ are unable or unwilling to display via their distribution systems and thus American Airlines is making the case that using Direct Connect would result in better service and in turn higher profits

American Airlines

3) Pricing – Direct Connect will allow American Airlines to instantly change its pricing pending consumer demand, weather, etc.  It will also allow them to set up unlimited rate structures for the same flight.  In essence, American Airlines could charge 150 different fees for the same flight, whereas with the GDS’ they are limited in general to only 16 to 30.

4) Control – Of course it gives American Airlines direct control over its ticketing distribution network.  Next time American Airlines comes up with a new rate structure or a new way to charge passengers it can instantly implement this via Direct Connect, whereas the GDS’ have the tendencies to be slow in adapting to new technologies and/or processes, let alone American Airlines won’t have to go through painstaking contract negotiations anymore.

What are the downsides to American Airlines?

1) Consumers – the main benefit of going through a GDS for a consumer or travel agent is that all the prices from most airlines are listed there.  It allows for comparison shopping, which is why OTA sites such as Expedia and Travelocity are so popular with consumers.  It gives the consumer the ability to price shop without having to toggle between multiple websites.  Direct Connect would force consumers to log on to American Airlines’ website to find tickets (or price shop), which in turn can be an inconvenience for many consumers.  Critics also point out that it may end up costing the consumer more money for the tickets as it will become increasingly more difficult for consumers to do a price comparison.

2) Bundle – GDS’ allow a consumer or travel agent to bundle a vacation package.  Not only can a consumer get an airline ticket through Expedia, but it can book the rental car and the hotel at the same time.  It may become a major inconvenience for some consumers to have to unbundle their purchases.

So who will win the ‘war’ between the GDS and American Airlines?

Nobody will know for some time to come.  it will depend on several factors:

1) Will other airlines follow suit?

Contracts are coming up for renewal with Sabre for other airlines soon.  If airlines like United, Delta, etc. follow American Airlines, it will become increasingly difficult for the GDS’  to hold on to its cash-cow, but if nobody follows American Airlines, the airline will risk alienating a lot of its consumers.

2) Will the GDS’ be able to modernize and be flexible enough in its pricing?

The benefit of having a virtual monopoly on a distribution network is that you don’t have to make that many changes/enhancements since your biggest clients have no choice but to use you.  However, ever since the push into direct connect by American Airlines the GDS’ run the risk of being stuck with an outdated system, which will make it more difficult for them to continue to renew their contracts as the value proposition may be lacking compared to direct connect systems.  They can avoid all of this by modernizing, but more important they may have to become more flexible in their service offerings and in their pricing.  It may cut into their cash-cow model, but at least it will allow them to continue to operate and remain profitable, albeit with a smaller margin.

3) What will the consumer do?

Consumer Choice

If American Airlines gets other airlines to follow the consumer and the travel agent may grow accustomed to the new process.  Southwest is a perfect example of how it can thrive on selling its tickets through its own website only.  Then again, they are a known low-cost carrier and airlines such as American Airlines may have a tougher time steering its consumers to its website.  In addition, it would seem that the airlines would need to ensure that they can continue to offer vacation bundles.

In the end, if American Airlines can attract enough consumers and travel agents to its Direct Connect System to make up for the once it will lose plus the cost savings associated with not having to pay the middlemen anymore then it will have a good chance of living without the GDS’.  One thing is for sure; the age of internet usage has given more power to the consumer and companies have no choice but to adapt to the changing world.  In the end it will be the consumer that will most likely determine who’s going to prevail in this war…

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